No BTFD In Overnight Yen Carry/Spoos Means Momo Confusion Continues

No Yen carry levitation overnight and, naturally, no Spoo levitation, with the futures struggling following the Nikkei's -1.7% drubbing (pushing it back to nearly -10% on the year) and down well from Friday's closing print. Risk averse sentiment following on from lower close on Wall Street on Friday, NASDAQ 100 (-2.7%) marked the worst session since 2011 dominated the price action in Asia, with JGBs up 32 ticks and the Nikkei 225 index (-1.7%). The Shanghai Composite was closed for a market holiday. Overall, stocks in Europe have recovered off lows but remain in negative territory (Eurostoxx50 -0.64%), with tech sector under performing in a continuation of sector weakness seen in the US and Asia, however Bunds remained under pressure as speculation of QE by ECB continued to undermine demand for core EU bonds. No major tier 1 releases scheduled for rest of the session, with focus likely turning to any policy related comments from ECB’s Weidmann, Constancio and Fed’s Bullard.

Bulletin headline summary from Bloomberg and RanSquawk

  • Treasuries steady, 10Y yield holding just above 50-DMA at 2.711%, after weaker than forecast March jobs report damped concern about fed funds rate increases; 2Y and 3Y yields near lowest since March 19.
  • Stocks are dropping around the world, with European shares snapping the longest rally since October, as investors sold technology shares
  • Two weeks of selling in the Nasdaq 100 Index, where  valuations are double the rest of the market, has sent anxiety among options traders to the highest levels since the flash crash four years ago
  • Pro-Kremlin demonstrators seized administration buildings in Ukraine’s east and called for the regions to join Russia as the government in Kiev accused President Vladimir Putin of stoking separatist unrest
  • As Putin completes Russia’s annexation of Crimea, Azerbaijain is feeling pressure to join a Moscow-led customs union, raising concern that his next move will be to shift his attention southward
  • Dutch authorities are investigating the deaths of former ABN Amro Netherlands’s CEO Jan Peter Schmittmann, his wife and a daughter, whose bodies were discovered two days ago in their home after a possible homicide and suicide
  • The University of Kentucky and its five freshmen starters are the pick of oddsmakers to cap a record-setting men’s college basketball tournament with the ninth championship in school history
  • Sovereign yields mostly higher. Asian stocks mixed, Nikkei falls 1.6%, Shanghai +0.7%. European equity markets, U.S. stock futures fall. WTI crude and gold lower, copper little changed

US Event Calendar

  • 3:00pm: Consumer Credit, Feb., est. $14.075b (prior $13.698b)
  • 11:45am: Fed’s Bullard speaks in Los Angeles Supply
  • 11:00am: U.S. to announce plans for auction of 4W bills
  • 11:00am POMO: Fed to purchase $900m-$1.15b in 2036-2044 sector

EU & UK Headlines

Bunds failed to benefit from the risk averse sentiment which saw stocks in Europe trade lower (albeit off the worst levels), as potential introduction of QE by the ECB continued to undermine demand for core EU paper. At the same time, peripheral EU spreads pared the initial tightening and are now seen marginally wider, amid profit taking related flow following last week’s ECB inspired spread tightening.

Of note, ECB's Nowotny said this morning that further rate cuts should not ruled out but no immediate need for further ECB action, adding that other tools may be more effective than rate cuts. ECB's Weidmann and Constancio due to speak later.


Stocks in Europe (Eurostoxx50 -0.64%) have managed to recover off the worst levels of the session, but remain lower across the board, with tech as the worst performing sector, as risk averse sentiment remains the dominant theme following an aggressive sell off on Wall Street on Friday and a negative close by the Nikkei 225 (-1.7%) in Asia. Overall, focus now turns onto the upcoming earnings season over in the US with Alcoa due after the closing bell on Wall Street tomorrow.


Overall, price action across major FX pairs this morning has been relatively subdued. Of note, there is approx. USD 1.3bln worth of USD/JPY intraday options due to expire at NY cut at 1500BST (0900CDT) between 103.00-50 levels.


Reports that Libyan officials and rebels have reached a deal to reopen two oil ports, effectively doubling Libya’s capacity, resulted in selling pressure on both WTI and Brent Crude futures overnight and in Europe this morning, though prices have come off the worst levels since. According to Libya rebel spokesman, state oil company NOC is free to start exports any time. In spite of this, analysts at Commerzbank said they see oil recovering as Libyan supply is to stay curbed, whilst Morgan Stanley says Brent crude may weaken further in May and June. Also of note, JPMorgan raised its US NatGas forecasts in 2014 to USD 4.58/mmbtu and USD 4.50 in 2015.

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Jim Reid's overnight summary concludes the weekend event recap

There was certainly an element of mystique to the post-payrolls price action on Friday, with a sharp sell-off occurring later in the session after what had initially looked like a 'Goldilocks' employment report. Before we get to that, overnight markets are starting the week influenced by how they ended Friday with EM outperforming DM. The Nikkei gapped lower at this morning’s open and is trading -1.4% as we type, following in the footsteps of the S&P 500 (- 1.25%) which posted its worst loss in 43 sessions. The Hang Seng (-0.6%) and ASX200 (-0.14%) are also weaker today, in contrast to the more EM-exposed indices such as the HSCEI (+0.3%) and Jakarta Composite (+1.4%). Friday’s 8bp gap lower in 10yr UST yields and a decent rally at the front end is helping the bid for EM assets today across credit and equities. In India, the focus is on the start of the general election cycle which stretches until May 12th. Latest polls show that Modi’s National Democratic coalition is likely to win power campaigning on a pro-business platform.

Friday’s selloff took many by surprise, especially since the initial reaction in stocks seemed to be positive with the S&P 500 breaking new intra-day records shortly after the opening bell. The selloff started with the US tech sector but the reality is that anything from high growth to high beta to high P/E stocks were all targeted by sellers. Even some of the larger tech stalwarts such as Google (-4.7%), Microsoft (-2.8%) and Apple (-1.3%) performed poorly. Indeed, it’s a been a pretty bad run of late for tech, with stocks such as Google (Class A shares) down 11% from the peaks. The broader NASDAQ (-2.6%) fell back into negative territory on a YTD basis and is down about 5% from the year’s highs. Even the US biotech sector, which had a feverishly strong run in the first two months of this year, saw a strong reversal on Friday as it dropped 4%. The biotech index is now down 14% from the February peak. We’re not sure we could point to anything in Friday’s payrolls reports to explain the selloff. Indeed there was something for both the bulls and the bears, with the headline of +192k falling short of expectations of +200k but offset by +37k of net revisions to January and February numbers. The disappointment of flat month-on-month earnings was offset by a rise in the average work week. Similarly, some were disappointed by the rise in unemployment to 6.7%, but the optimists pointed out the substantial rise in participation rate to 63.2%.

One of the themes in weekend press was whether the DM central banks were doing enough to fight disinflation. Europe ended last week debating whether the ECB would eventually step up with some form of asset purchase program after Reuters reported on Friday that the central bank had modelled the economic effects of buying EUR1trillion of securities, citing German media sources. ECB board member Benoit Coeure was quoted on the weekend by France’s Le Figaro saying that the European economy could possibly do with lower rates. But he said that QE at this stage was not necessary, in a sense repeating what Draghi had said at the last ECB meeting. Staying with the topic of QE, Bloomberg has reported that the BoJ will probably double purchases of ETFs in a second round of easing in coming months, although it unlikely to occur at tomorrow’s BoJ meeting.

While the issue has been on the backburner over the last couple of weeks, tensions between Ukraine and Russia continue to simmer away. A $2.2bn gas bill is due to be paid by Ukraine to Russia this morning local time. While the Ukrainian government has said it will likely honour the payment, there is still plenty of animosity over Friday’s 80% price hike for Russian gas. Friday’s price increase was the second price hike in just three days (Reuters). According to Reuters, the new $485 price is the highest of any Gazprom customer and compares with about $370 on average for clients in the European Union. Adding to the tension, on Sunday a number of Ukrainian cities saw protests from Pro-Russian groups including in Donetsk where protestors stormed the region’s administration building calling for an independence referendum.

Administrative buildings in other Eastern Ukrainian cities, Kharkiv and Luhansk, were also occupied by protestors yesterday who also called a boycott of upcoming presidential elections on May 25th. NATO’s chief said late last week that Russian troops massed on the Ukrainian border have shown no
signs of decreasing.

Back to Europe, with Greece looking to return to international bond markets shortly, the ESM’s Regling warned Greece on the weekend not to overpay for international funding. Regling said that “it was natural that Greece wanted to test the markets, but warned it to not pay too steep a yield, to avoid increasing its debt load”. Ironically, while markets talk of a return of Greece, Germany’s FinMin Schaeuble said that he did not rule out Greece needing a third international bailout to cover the country’s funding gap over the next two years – although any international funding will be much smaller than the first two rounds (ekathimerini).


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